History of economic thought

Early economic thought was all about the meaning of wealth. According to it, a nation's wealth depended on its owning precious metals.

During medieval times trading between nations grew, and a new social class of merchants appeared. They made their money through the buying and selling of goods. They saw the economy as a way to make the state strong. For them, the nation’s wealth depended on stocks of gold and the size of the population. More people meant bigger armies and a stronger state.

Daily experience taught people many basic economic concepts. For example, they realized that scarcity makes things more expensive and abundance makes them cheaper.

Modern economics was really born in the 19th century. Adam Smith is often called the Father of Modern Economics, as his ideas are still important today. He realized that a nation’s wealth depended on its ability to produce goods. The value of these goods depended on the cost of production. The cost of production depended on the cost of workers, raw materials and land. This was really the first example of macroeconomics.

Smith and other classical economists were writing at a time of the industrial revolution. Paper money began to replace precious metals. The middle classes were growing stronger. Economists’ theories echoed these changes. They wrote about the division of labour (each worker taking their part in the production process). They discussed the problems of population growth.

For classical economists, the value of goods depends on the cost of production. However, the price of goods is not always the same as their real cost. At the end of the 19th and early 20th centuries, neoclassical economists developed new theories to explain this weakness in classical economics. In their economies, supply and demand make the economy work. The price of goods depends on how much people want them and how easily they can be found. Consumers want satisfaction from their resources (time and money). Firms want profit. In neoclassical economics, this is the basic relationship in the economy. These ideas are still true today.

Read the text and decide whether these statements are true or false.

1 According to merchants, a nation's wealth depended on its owning precious metals.

2 Scarcity and abundance play a vital role in the pricing process.

3 Only the cost of workers has an effect on the cost of production.

4 The theory about the division of labour first appeared in neoclassical economics. 

5 Economists later found a problem with the classical model.

6 In neoclassical economics, supply and demand control price.